Government of the Philippine Islands v.

El Hogar
AUTHOR: Magsino, Patricia Marie C.
G.R. No. L-26649 (July 13, 1927)
NOTES: 17 causes of action, take note of nos. 4,5,6, and 8
TOPIC: Internal organization of corporation
about by laws
PONENTE: Street, J.
FACTS:
Original Action in the Supreme Court
Quo warranto proceeding by Govt. of the Philippine Islands against El Hogar Filipino purpose is to deprive it of its
corporate franchise, exclude it from all corporate rights, and privileges, and effect a final dissolution of the
corporation
El Hogar organized under Sec. 171-190 Act No. 1459, devoted to the subject of building and loan associations, their
organization and administration.
The capital of the corporation was not permitted to exceed P3M, but Act No. 2092 amended the statute, permitting
capitalization to the amount of ten millions.
El Hogar amended its AOI stating that the amount of capital must not exceed what has been stated in Act No. 2092
This resulted to El Hogar El Hogar having 5,826 shareholders, 125,750 shares with paid-up value of P8.7M, the
corporation paid P7.16M to its withdrawing stockholders
The Government of the Philippine Islands filed an action against El Hogar due to the alleged illegal holding title to
real property for a period exceeding five (5) years after the same was bought in a foreclosure sale. Sec. 13(5) of the
Corporation Law states that corporations must dispose of real estate obtained within 5 years from receiving the title
The Philippine Government now wants that El Hogar be excluded from all corporate rights and privileges and effect a
final dissolution of said corporation

BACKGROUND OF RECORDED MORTGAGE:

El Hogar was the holder of a recorded mortgage on a San Clemente land as security for a P24K loan to El Hogar.,
but shareholders and borrowers defaulted in payment so El Hogar foreclosed the mortgage and purchased the land
during the auction sale.
A deed of conveyance in favor of El Hogar was executed and sent to the Register of Deeds of Tarlac with a request
that the certificate of title be cancelled and a new one be issued in favor of El Hogar from the Register of Deeds of
Tarlac.
No reply was received so El Hogar filed a complaint with the Chief of the General Land Registration Office. The
certificate of title to the San Clemente land was received by El Hogar and a board resolution authorizing Benzon to
find a buyer was issued
Alcantara, the buyer of the land, was given extension of time to make payment but defaulted so the contract treated
rescinded. Efforts were made to find another buyer. El Hogar acquired title in December 1920 until the property was
finally sold to Felipa Alberto in July 1926
The interval exceeded 5 years but the period did not commence to run until May 7, 1921 when the register of deeds
delivered the new certificate of title.

ISSUE(S):

Do the acts of respondent corporation merit its dissolution or deprivation of its corporate franchise, and the
exclusion from all its corporate rights and privileges

HELD:
NO. Court will not dissolve but will confine El Hogar to its legitimate purposes.
confine El Hogar Filipino to its legitimate purposes and to force it to eliminate its illegitimate purposes and
The government has made out its case, but the defendant should be permitted a reasonable time to fulfill the
conditions laid down in this decision.
RATIO: LISTED BELOW ARE THE 17 CAUSES OF ACTIONS AND THE COURTS DECISION AND RATIO.
1) Alleged illegal holding of real property for a period exceeding five years from receipt of title-Cause of delay is not
the respondents fault
2) That respondent is owning and holding a business lot with the structure in excess of its reasonable requirements

and in contravention of Sec. 13(5) of Corpo. Law COURT FINDS NO MERIT

Every corporation has the power to purchase, hold and lease such real property which they may reasonably and
necessarily require.
3) That respondent is engaged in activities different to the purposes for which the corporation was created and not
reasonably necessary to its legitimate purpose COURT FINDS MERIT
The administration of property, payment of real estate taxes, causing necessary repairs, managing real properties
of non-borrowing shareholders is more befitting to the business of a real estate agent or a trust company than a
building and loan association.
4) That the by-laws of the association stating that, the board of directors by the vote of an absolute majority of its
members is empowered to cancel shares and to return the balance to the owner by reason of their conduct or any
other motive or liquidation is in direct conflict with Sec. 187 of the Corporation Law which provides that the board
of directors shall not have the power to force the surrender and withdrawal of unmatured stock except in case of
liquidation or forfeiture of stock for delinquency COURT FINDS NO MERIT
There is no provision of law making it a misdemeanor to incorporate an invalid provision in the by-laws of a
corporation; and if there were such, the hazards incident to corporate effort would be largely increased.
5) Art. 61 of El Hogars by-laws states that attendance in person or by proxy by shareholders owning one-half plus
one of the shareholders shall be necessary to constitute a quorum for the election of directors is contrary to Sec.
31 of the Corpo Law which provides that owners of the majority of the subscribed capital stock entitled to vote
must be present either in person or by proxy at all elections of directors COURT FINDS NO MERIT
Corporation is not at fault for failure of the shareholders to attend the annual meetings and their non-attendance in
meeting is not to be interpreted as their assent to the way the corporation is being handled. Mere failure of a
corporation to elect officers does not terminate the terms of existing officers nor dissolve the corporation. The
general rule is to allow the officer to holdover until his successor is duly qualified.
6) That the directors of El Hogar, instead of receiving nominal pay or serving without pay, have been receiving large
compensation, varying in amount from time to time, out of respondents profits COURT FINDS NO MERIT
With the growth of the corporation, the amount paid as compensation to the directors has increased beyond what
would probably this cant be corrected in this court. Nor can it properly be made a basis for depriving respondent
of its franchise or enjoining it from compliance with the provisions of its own by-laws. If a mistake has been made,
the remedy is to lie rather in publicity and competition.
7) That the promoter and organizer of El Hogar was Mr. Antonio Melian and that in the early stages of the
organization of the association, the board of directors authorized the association to make a contract with him and
that the royalty given to him as founder is unconscionable, excessive and out of proportion to the services
rendered COURT FINDS NO MERIT
The mere fact that compensation is in excess of what may be considered appropriate is not a proper consideration
for the court to resolve. That El Hogar is in contact with its promoter did not affect the associations legal character.
The court is of the opinion that the traditional respect for the sanctity of the contract obligation should prevail over
the radical and innovating tendencies.
8) That Art. 70 of El Hogars by-laws, requiring persons elected as board of directors to be holders of shares of the
paid up value of P5,000 which shall be held as security, is objectionable since a poor member or wage earner
cannot serve as a director irrespective of other qualifications COURT FINDS NO MERIT
Corporation Law expressly gives the power to the corporation to provide in its by-laws for the qualification of its
directors and the requirement of security from them for the proper discharge of the duties of their office in the
manner prescribed in Art. 70 is highly prudent and in conformity with good practice.
9) That respondent abused its franchise in issuing special shares alleged to be illegal and inconsistent with the plan
and purposes of building and loan associations COURT FINDS NO MERIT
The said special shares are generally known as advance payment shares which were evidently created for the
purpose of meeting the condition caused by the prepayment of dues that is permitted. Sec. 178 of Corpo Law

allows payment of dues or interest to be paid in advance but the corporation shall not allow interest on advance
payment grater than 6% per annum nor for a period longer than one year. The amount is satisfied by applying a
portion of the shareholders participation in the annual earnings. The mission of special shares does not involve
any violation of the principle that the shares must be sold at par.
10) That in making purchases at foreclosure sales constituting as security for 54 of the loans, El Hogar bids the full
amount after deducting the withdrawal value, alleged to be pursuing a policy of depreciating at the rate of 10
percent per annum, the value of the real properties it acquired and that this rate is excessive COURT FINDS NO
MERIT
The board of directors possesses discretion in this matter. There is no provision of law prohibiting the association
from writing off a reasonable amount for depreciation on its assets for the purpose of determining its real profits.
Art. 74 of its by-laws expressly authorizes the board of directors to determine each year the amount to be written
down upon the expenses for the installation and the property of the corporation. The court cannot control the
discretion of the board of directors about an administrative matter as to which they have no legitimate power of
action.
11) That respondent maintains excessive reserve funds COURT FINDS NO MERIT
The function of this fund is to insure stockholders against losses. When the reserves become excessive, the
remedy is in the hands of the Legislature. No prudent person would be inclined to take a policy in a company
which had conducted its affairs poorly that it only retained a fund barely sufficient to pay its present liabilities and
was in a condition where any change by the reduction of interest upon or depreciation in the value of securities or
increase of mortality would render it insolvent and subject to be placed in the hands of a receiver.
12) That the board of directors has settled upon the unlawful policy of paying a straight annual dividend of 10 percent
per centum regardless of losses suffered and profits made by the corporation, in contravention with the
requirements of Sec. 188 of the Corporation law COURT FINDS NO MERIT
As provided in the previous cause of action, the board of directors shall determine the profits and losses and this
means that they shall exercise the usual discretion of good businessmen in allocating a portion of the annual
profits to purposes needful of the welfare of the association. The law contemplates distribution of earnings and
losses after legitimate obligations have been met.
13) That El Hogar has made loans to the knowledge of its officers which were intended to be used by the borrowers for
other purposes than the building of homes and no attempt has been made to control the borrowers with respect to
the use made of the borrowed funds COURT FINDS NO MERIT
There is no statute expressly declaring that loans may be made by these associations SOLELY for the purpose of
building homes. The building of homes in Sec. 171 of Corporation Law is only one among several ends which
building and loan associations are designed to promote and Sec. 181 authorizes the board of directors of the
association to fix the premium to be charged.
14) That the loans made by defendant for purposes other than building or acquiring homes have been extended in
extremely large amounts and to wealthy persons and large companies COURT FINDS NO MERIT
The question of whether the making of large loans constitutes a misuser of the franchise which would justify the
court in depriving the association of its corporate life; is a matter confided to the discretion of the board of
directors. The law states no limit as to the size of the loans to be made by the association. Resort should be had to
the legislature because it is not a matter amenable to judicial control
15) That when the franchise expires, supposing the corporation is not reorganized, upon final liquidation of the
corporation, a reserve fund may exist which is out of all proportion to the requirements that may fall upon it in the
liquidation of the company COURT FINDS NO MERIT
This matter may be left to the discretion of the board of directors or to legislative action if it should be deemed
expedient to require the gradual suppression of reserve funds as the time for dissolution approaches. It is no
matter for judicial interference and much less could the resumption of the franchise be justified on this ground.
16) That various outstanding loans have been made by the respondent to corporations and partnerships and such
entities subscribed to respondents shares for the sole purpose of obtaining such loans COURT FINDS NO
MERIT

Sec. 173 of Corporation Law declares that any person may become a stockholder in building and loan
associations. The phrase ANY PERSON does not prevent a finding that the phrase may not be taken in its proper
and broad sense of either a natural or artificial person.
17) That in disposing real estate purchased by it, some of the properties were sold on credit and the persons and
entities to which it was sold are not members nor shareholders nor were they made members or shareholders,
contrary to the provision of Corporation Law requiring loans to be stockholders only COURT FINDS NO MERIT
The law does not prescribe that the property must be sold for cash or that the purchaser shall be a shareholder in
the corporation. Such sales can be made upon the terms and conditions approved by the parties.

CASE LAW/ DOCTRINE:

DISSENTING/CONCURRING OPINION(S):